Why would you purchase a second home as an investment?
This is usually asked when discussing different investment options, and property versus stocks and shares as a retirement plan is often the debate, says Lanice Steward, managing director of Knight Frank Anne Porter.
After five years of negative capital growth in property and all the indicators being that the market is improving, now is the time for property investors to re-examine the market, she says.
Given the stringent lending criteria of the banks over the last five years, if you were interested in investing in a property now would be a good idea to contact a bond originator first to establish what finance you qualify for, she says.
Why property?
Steward says property, over a long period (20 to 25 years) has been proven to keep pace with inflation while giving the investor around a five to six percentage return. The return, however, must be seen as the combined capital appreciation that the property achieves over time.
Property is an ideal way to build capital. It is a means to put together a retirement nest egg without investing all of one’s money upfront, which would have to be done with stocks or shares, she says. Apart from the deposit put down, the bulk of the finance comes from a mortgage loan in most cases.
What to buy?
If it is an investment property the return will be better on two or three smaller units than on one larger property.
“It is always better to spread the risk should you end up with a unit unoccupied for a time. Rather have one unit with a rental of R4 000 empty and one or two others with tenants than have one large house with a rental of R12 000 standing empty.”
With smaller units, there is also a lower cost to maintaining the exterior or garden than homes with larger gardens. Sectional title units are a good option as investment properties because the common property is managed by the body corporate of the scheme.
Steward says if you do decide to buy a freestanding property with a garden, be sure to include a garden and pool service in the rental and note these in the lease as necessary because tenants often do not look after the garden and this is a huge value loss to a property if it is left to go to ruin.
When considering what to buy, look for the worst property in the best area, she says, i.e. smaller houses with lower prices in good areas are better than larger homes or higher prices in areas that are not sought-after or out of town.
Student accommodation and new developments can be a good investment if the units are bought off-plan.
In the rental market, bear in mind that a home that is close to trains, buses or the BRT route will be a big attraction for tenants. A tenant might even be willing to pay slightly more for this type of unit and it is also best for the unit to be in close proximity to shops or schools.
“If investing in a property in a partnership, which is sometimes a solution if you can’t afford the bond on your own, be careful to establish beforehand what would happen if one partner wants to realise their capital before the agreed time.”
Steward says decide what the ‘rules’ would be and whether it would be a straight buy-out of the share of the property or whether they would find another person to buy their share of the property.
Property investment is the most stable investment to make, as homes will always be needed and there is less chance of losing value if you stick to the guidelines of when, where and how to buy, she says.
“After a few years there may be a chance to own a few units and this could be a healthy income later or one or more of the units could be sold to live off the capital. In a case like this always be sure that the interest off the capital amount will be higher than the rental received on the unit before selling it.”
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